As state and federal agencies ramp up efforts to curb unemployment fraud, employers are facing greater scrutiny and steeper consequences for compliance gaps. But fraud isn’t the only risk on the rise. The end of 2025 brought major regulatory shifts that impact tax credits, employment eligibility, and payroll compliance—making it critical for HR and payroll teams to approach 2026 with clear strategy and up-to-date tools.
Watch the webinar on-demand: Don’t miss our combined session, “Dangers of UI Fraud” and the Q4 Regulatory & Legislative Update. You’ll get expert commentary on fraud trends, policy shifts, and employer action steps.
Access the webinar replay here
Identity Theft Is Still the Top UI Fraud Threat
In our UI Fraud webinar, Experian experts confirmed that identity theft remains the #1 type of unemployment insurance fraud, especially in remote and hybrid workforce models. Claims filed under the names of active employees or fake identities can go undetected—until the employer gets hit with the tax consequences.
Two common types include:
- Stolen Identity Claims: Fraudsters file under real employee names using stolen credentials.
- Claim Hijacking: A legitimate claimant’s benefits are redirected after their account is accessed fraudulently.
Employers must act quickly when fraud is suspected—report it to the state and advise employees to monitor or freeze credit.
New Wave: Fake Employers, Bigger Payouts
In addition to fraudulent claims, state agencies are now targeting fictitious employers—shell companies created to submit fake wage reports and collect benefits for non-existent employees. These schemes are more sophisticated and harder to catch without employer cooperation during wage audits.
The Cost of Fraud: You Pay the Price
UI fraud doesn’t just harm state trust funds—it directly impacts employers through:
- Increased unemployment tax rates
- Audit triggers
- Delays in legitimate claims
- Reputational damage in state systems
Even though only 1.3% of overpayments are caused by employers, late or incorrect responses can have costly consequences.
Shutdowns and Enforcement: Compliance Doesn’t Sleep
While the federal government endured a record-breaking shutdown in late 2025, enforcement didn’t stop. In fact:
- ICE and DHS continued audits and E-Verify processing
- IRS deadlines remained in effect
- States expanded wage theft and unemployment laws
The message is clear: compliance responsibilities remain active, even during federal disruptions.
State Law Spotlight: Wage Theft, AI, and UI Expansion
Employers must also prepare for new state laws, including:
- Rhode Island: New-hire wage theft notice requirements starting 2026
- Illinois: AI restrictions in hiring if discrimination is detected
- Washington & Oregon: New UI benefits for striking workers, increasing trust fund pressure
And these changes aren’t outliers—over 1,000 AI-related bills were introduced nationwide in 2025, with paid leave and wage transparency laws also gaining traction.
Preventing Fraud Is a Team Effort: What You Can Do
Experian recommends a multi-pronged approach:
- Respond quickly to all UI claims
- Audit payroll, separation processes, and seasonal hiring protocols
- Watch for claims from current employees or unknown names
- Report suspicious activity to state agencies
- Verify employee identity before completing I-9s
- Educate teams to recognize and flag red flags
And most importantly—implement or strengthen your internal I-9 audit process. A reliable electronic I-9 system with audit trails, E-Verify integration, and correction workflows is essential in today’s enforcement environment.
Regulatory Look Ahead: I-9, WOTC, and Tax Compliance
In tandem with fraud risk, 2025 delivered high-impact policy changes, including:
- Elimination of auto-extensions for EADs, increasing document expiration risks
- A new W-4 and W-2 draft for 2026, requiring updated payroll processes and tip tracking under the One Big Beautiful Act (OBBA)
- A pending decision on WOTC renewal, which expired 12/31/25. No bill has passed, but retroactive approval is likely—employers should continue capturing WOTC data.
Unemployment trust funds also remain underfunded in most states, which may lead to taxable wage base increases and higher FUTA taxes in 2026 and beyond.
Final Takeaways: Your 2026 Fraud & Compliance Readiness Checklist
- Begin or expand internal I-9 and UI audits
Use electronic I-9 platforms with real-time E-Verify
Track WOTC applicants even if renewal is delayed
Train staff to spot identity and payroll fraud
Monitor state laws affecting payroll, hiring, and separation
Review IRS changes to W-4 and W-2 ahead of 2026
Get prepared now—not after you’ve been hit with an audit or fraudulent claim.
Watch our webinar replay to hear directly from compliance and unemployment experts.
For ongoing insights, tools, and thought leadership, visit the Experian Employer Services Blog.